Live Earnings Conference Call: Leslie's will host a live Q2 2025 earnings call on May 8, 2025 at 5:30PM ET. Follow this link to get details and listen to Leslie's' Q2 2025 earnings call when it goes live. Get details. NASDAQ:LESL Leslie's Q3 2023 Earnings Report $0.70 +0.04 (+6.56%) Closing price 05/7/2025 04:00 PM EasternExtended Trading$0.68 -0.02 (-2.28%) As of 07:00 AM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast Leslie's EPS ResultsActual EPS$0.40Consensus EPS $0.39Beat/MissBeat by +$0.01One Year Ago EPSN/ALeslie's Revenue ResultsActual Revenue$610.89 millionExpected Revenue$611.08 millionBeat/MissMissed by -$190.00 thousandYoY Revenue GrowthN/ALeslie's Announcement DetailsQuarterQ3 2023Date8/2/2023TimeN/AConference Call DateWednesday, August 2, 2023Conference Call Time4:30PM ETUpcoming EarningsLeslie's' Q2 2025 earnings is scheduled for Thursday, May 8, 2025, with a conference call scheduled at 5:30 PM ET. Check back for transcripts, audio, and key financial metrics as they become available.Q2 2025 Earnings ReportConference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by Leslie's Q3 2023 Earnings Call TranscriptProvided by QuartrAugust 2, 2023 ShareLink copied to clipboard.There are 13 speakers on the call. Operator00:00:00As a reminder, this conference call is being recorded and will be available for replay later today on the company's website. I will now turn the call over to Kathleen Turffield, Investor Relations. Please go ahead. Speaker 100:00:17Thank you, and good afternoon. I would like to remind everyone that comments made today may include forward looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. During the call today, management may refer to certain non GAAP financial measures. Speaker 100:00:50A reconciliation between the GAAP and non GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir. Lesleyspool.com. On the call today from Leslie's are Mike Ejek, Chief Executive Officer Steve Waddell, Chief Financial Officer and Scott Bowman, Chief Financial Officer Designate. With that, I will turn the call over to Mike. Mike? Speaker 200:01:19Thanks, Caitlin, and good afternoon, everyone. Thank you for joining us. Please note that we have posted a Q3 2023 earnings deck to the Lesley's IR site and that we will be referring to certain pages in that deck during our call. As we shared in our pre release 3 weeks ago, it was a difficult quarter. Low double digit traffic declines resulted in a 12% comparable sales decline and a 9% total sales decline. Speaker 200:01:46In addition to fixed cost deleverage associated with these sales, We faced unexpected in season product cost increases and higher distribution expenses that significantly impacted gross margins for the quarter. Our ongoing analysis points to 3 primary drivers of our Q3 traffic and sales results. The first is weather. Our weather reporting service, Planalytics, calculated that weather was a 5% year over year headwind to sales in the quarter. Weather headwinds were felt across most of our store base and most significantly in California, Texas and Arizona. Speaker 200:02:21The weather in Florida was relatively normal in the quarter as it has been all year and our business in Florida significantly outperformed in the quarter year to date. Sales in Florida were plus high single digits in the quarter and are plus mid teens year to date. The second driver was increased consumer price sensitivity. After 3 years of significant price inflation, consumers were not willing to absorb price increases during the quarter. This prevented us from taking the pricing actions required to maintain margins as product costs increased and also prevented us from maintaining our pre June 1st Pricing on core chemicals. Speaker 200:02:59As we have discussed before, we generally aim to maintain a relative price point that is above mass and just below specialty. That relative price position was out of balance for some weeks in the Q3, which we addressed with our June 1 price actions. Those actions resulted in essentially flat year over year chemical pricing despite higher costs. And the 3rd driver was that a portion of our customers had a greater than normal amount of chemicals left over from last year. This driver was validated by 2 separate consumer surveys, 1 conducted on our behalf and another that was conducted on behalf of 1 of our chemical partners. Speaker 200:03:38This consumer behavior is not something we have seen before and was surprising given the hazardous nature and useful life of these chemicals. Transactions were down 12% in the quarter, reflecting double digit traffic declines that offset solid conversion rates. Average order value increased 3%. The traffic decline was broad based and impacted both nondiscretionary and discretionary product sales. For the quarter, non discretionary sales were down 6% and discretionary sales were down 24%. Speaker 200:04:13Total chemical sales for the quarter were down 6% as increases in Cal Hypo and Select Specialty Chemicals partially offset a 16% decrease in TRICORE sales. Equipment sales were down 8% in the quarter, driven primarily by volume. The decrease in discretionary product sales was driven by hot tubs and aboveground pools as macro factors continue to impact demand for these highly discretionary high ticket items. Non comp sales contributed plus 3% to the quarter, driven by acquisitions and new store builds. The data we analyze suggest that the top line trends we are seeing are an industry wide issue. Speaker 200:04:57Aggregated credit card For the pool supplies retail category on Slide 7 indicates that the industry sales ex Leslie's were down 7.1% for the quarter. Based on total company sales, our declines were 220 basis points more than the category for Q3. That said, aggregated credit card data for the pool supplies retail category does not include hot And when we adjust out those 2 categories from our sales for a more comparable review, Leslie's performed slightly better than the industry. We are clearly experiencing a highly unusual pool season following 3 years of strong growth. However, the long term fundamental advantages The pool industry remains the same. Speaker 200:05:43New pools continue to be built and the growing installed base of pools need to be maintained. As you can see on Slide 8, the industry has a long track record of consistent growth and Leslie's has consistently grown faster than the industry. So while our team navigates the current industry headwinds, we also remain focused on executing the key strategic initiatives that underpin our competitive advantages and that will continue to drive our long term success as industry conditions normalize. Turning to our strategic growth initiatives. 1st, given the traffic challenges in the quarter, our customer file was down 8% versus the prior year's quarter. Speaker 200:06:352nd, average revenue per customer was down 1% in the quarter, driven primarily by decreases in big ticket items, specifically hot tubs and above ground pools. Our Pool Perks loyalty members continue to outperform. Loyalty member sales were down 3% in the quarter. With regard to our PRO initiatives, We ended the quarter with more than 3,700 Pro contracts in place and completed the conversion of 15 residential stores to our PRO format prior to the start of the season. We currently operate 98 PRO locations. Speaker 200:07:12Pro consumer group sales declined 3% in the quarter with comp sales down 13% as our pro comps were impacted by the same factors as our overall business. In addition, Tricore pricing has been more pressured on the pro side as compared to the residential channel and contributed an outsized headwind to our overall gross margin performance. Our guidance for the remainder of the year assumes no change from current pricing levels. M and A and new store growth remain an important initiative for Leslie's, though we will be prudent with the pace of this initiative in the near term as we balance it against our other capital allocation priorities. M and A and new stores grew up $16,000,000 to non comp sales in the quarter. Speaker 200:07:57We also completed 2 acquisitions in the quarter that added 5 locations in the Sunbelt. Year to date, we have closed 5 acquisitions that added 12 locations and we have another acquisition under LOI. In the quarter, we opened 7 new stores, bringing the year to date total to 12. We remain confident in the total store expansion available to Leslie's over the long term and have identified over 800 opportunities for store densification. We will continue to address each of these opportunities with a buy or build analysis. Speaker 200:08:32For Accu Bull Home, We were pleased to launch the program in May and have been very pleased with the consumer response and demand we have seen to date, all despite nominal marketing. While demand has been strong, we are facing supply chain constraints as we ramp up, and we are working with our vendor to increase production in order to meet consumer demand. With regards to our outlook, Our guidance for Q4 assumes no improvement to the top line trends we experienced in Q3. For gross margin, we expect Q4 to have a full quarter impact from the chemical price actions we took on June 1, which will be partially offset by the wind down of distribution costs associated with our peak inventory levels. We have also aggressively initiated cost management actions that coupled with some unique SG and A comparisons should result in Q4 SG and A being approximately $15,000,000 to $20,000,000 lower versus the prior year quarter. Speaker 200:09:32In summary, we continue to have confidence in the long term outlook for the industry and we remain focused on prudently executing our strategic initiatives to capture the opportunities in front of us and further our industry leadership. At the same time, we are focused on taking immediate actions to improve our performance. Let me reiterate the actions we are taking. Number 1, we have adjusted pricing to reflect current market conditions and are now at our relative historical price position, which is slightly above mass and home improvement and at or slightly below specialty retailers. Number 2, we are aggressively managing inventory through receipt reductions. Speaker 200:10:15Number 3, we are focused on cost management throughout the P and L, including being disciplined on our marketing investments, utilizing strict ROI criteria. Number 4, we continue to evaluate, develop and elevate our processes and people. And number 5, We are enhancing our consumer insight efforts to further improve our understanding of evolving consumer behavior. Before Steve discusses our results and outlook, I want to acknowledge our CFO transition. I'm very pleased to welcome Scott Bowman as our new CFO effective August 7. Speaker 200:10:52Scott's depth and breadth of public company experience spans both financial and operational areas and will be a huge asset as we return the business to growth. I would also like to thank Steve for his leadership and partnership as well as his commitment to ensuring a smooth transition. I'll turn it over to Scott to say a few words. Speaker 300:11:13Thank you, Mike. Lesley's has carved out an admirable leadership position in an attractive industry and based on my initial observations, I see plenty of areas where I can leverage my experience to help drive Lesley's strategic priorities. As I continue getting up to speed on the business, I look forward to digging into areas such as supply chain, product margin management, forecasting and capital allocation to help deliver continuous improvement in the business. It's an exciting time to join the team as we drive the next chapter of the company's growth, and I look forward to speaking with all of you in the coming weeks months. Now, I'll turn it over to Steve to share more detail on the Q3 financial results and outlook. Speaker 400:11:54Good afternoon, everyone, and thank you, Mike and Scott. While we have seen slow starts to pool season in prior years due to unfavorable weather conditions, historically performance has improved around Memorial Day. This year, our Q3 performance was impacted by industry wide headwinds due in part to continued unfavorable weather along with atypical consumer For the Q3, we reported sales of $611,000,000 a decrease of 9% or $63,000,000 when compared to the Q3 of fiscal 2022. Our comparable sales decreased 12% for $79,000,000 Our comparable sales on a 2 year stack basis decreased 4% and on a 3 year stack basis grew 15%. Our non comparable sales totaled $16,000,000 in the Q3 of fiscal 2023, which was driven by 9 completed acquisitions that added 25 stores as well as 19 net new store openings since the end of the Q2 of fiscal 2022. Speaker 400:13:03With respect to trends by consumer group, comparable sales declined 10% for residential pool, 13% for pro pool and 23% for residential hot tub. On a 2 year stack basis, comparable sales declined to 5% for residential pool, increased 4% for Pro Pool and declined 7% for residential hot tub. While our 3rd quarter sales The declines were unprecedented. They were in line with industry trends. Gross profit decreased 17% or $52,000,000 compared to the Q3 of fiscal 2022 and gross margin rate was down 390 basis points to 41.2% from 45.1% in the prior year period. Speaker 400:13:47Page 11 of our supplemental deck illustrates our Q3 gross margin rate bridge in more detail. During the quarter, gross margins were impacted by 4 primary factors. 1st, incremental distribution expenses, including those related to capitalized distribution costs and investments in labor, off-site storage and transportation costs, lowered gross margin by 150 basis points. Approximately 50 basis points of this rate decline was due to deleverage of fixed Distribution costs from lower comparable sales. Regarding higher capitalized costs, as we built up inventory in prior periods, We capitalized more distribution costs and during this quarter, we recognized some of those costs as we sold through the inventory. Speaker 400:14:30We have also continued to invest in our distribution network to ensure it operated smoothly at significantly higher capacities with improved service levels to support better in stock positions across our businesses. We expect the gross margin headwind from distribution expenses to be smaller in the 4th quarter. 2nd, higher product costs had a 140 basis point impact on gross margins in the quarter. While we experienced higher product costs across categories, The largest impact was in our chemicals categories. We initially increased our selling prices for chemicals at the start of the season, but we were unable to successfully maintain those higher pricing levels. Speaker 400:15:09And as Mike discussed, we reduced prices on June 1. We expect greater product margin rate pressure in the Q4 as we experience a full quarter impact of those price changes. 3rd, occupancy and other costs deleveraged by 70 basis points predominantly due to the decline in comparable sales. We expect continued rate pressure in the Q4 related to occupancy and other costs deleverage given our comparable sales expectations. And finally, business mix impacted gross margins by 30 basis points, primarily due to M and A completed during the last 12 months. Speaker 400:15:45We expect a smaller impact on rate from business mix in the Q4. Looking at the numbers in a different way, Deleverage of fixed costs impacted gross margin rate by 115 basis points in the quarter, with the remaining 275 basis points of margin compression due to lower product margin, higher distribution costs and business mix. Now I'll turn to SG and A. SG and A increased 3% or $4,000,000 compared to the Q3 of fiscal 2022. We continue to focus on managing costs in the business, Generating cost savings and driving ongoing organizational optimization. Speaker 400:16:22During the quarter, we were able to partially offset higher SG and A Acquired businesses and new stores, investments in our associates and non recurring costs with $6,000,000 of like for like expense reductions compared to last year. We have taken additional actions to reduce our SG and A in the Q4 and into fiscal 2024. Adjusted EBITDA was $129,000,000 compared to $183,000,000 in the prior year. Interest expense increased to $18,000,000 during the quarter from $7,000,000 in the prior year and our effective tax rate increased to 26.1% compared to 25.7% in the prior year. Adjusted net income was $76,000,000 in the Q3 of fiscal 2023 compared to adjusted net income of $126,000,000 in the prior year. Speaker 400:17:12And adjusted diluted earnings per share was $0.41 in the Q3 of fiscal 2023 compared to $0.68 in the prior year. Diluted weighted average shares outstanding were 185,000,000 in both the Q3 of fiscal 2023 and fiscal 2022. Now I'll turn to year to date results. Total sales for the 1st 9 months of fiscal 2023 decreased $68,000,000 or to $1,019,000,000 from $1,087,000,000 in the prior year. Our comparable sales decreased 11% or $118,000,000 On a 2 3 year stack basis, our comparable sales were flat and up 23%, respectively. Speaker 400:17:57Gross profit for the 1st 9 months of fiscal 2023 decreased 15% were $69,000,000 to $388,000,000 from $457,000,000 in the prior year. Gross margin rate decreased by 390 basis points to 38.1 percent from 42.0 percent in the prior year, of which 140 basis points was due to negative comparable sales growth in the first 9 months of fiscal 2023. Adjusted EBITDA was $109,000,000 in the 1st 9 months of fiscal 2023 compared to $193,000,000 in the prior year. Interest expense increased to $48,000,000 during the 1st 9 months of fiscal 2023 from $21,000,000 in the prior year. Adjusted net income was $25,000,000 in the 1st 9 months of fiscal 2023 compared to $112,000,000 in the prior year. Speaker 400:18:50And adjusted diluted earnings per share was $0.14 in the 1st 9 months of fiscal 2023 compared to $0.60 in the prior year. Moving to the balance sheet. We finished the Q3 of fiscal 2023 Cash of $19,000,000 and we had $31,000,000 outstanding on our ABL. This compares to cash of $193,000,000 and no amounts outstanding on our ABL at the end of the Q3 of fiscal 2022. The reduction in net cash was primarily due to investments in inventory and higher M and A activity during the past 12 months. Speaker 400:19:24Currently, we do not have any amount outstanding on our ABL and we have availability of approximately 240,000,000 We ended the Q3 of fiscal 2023 with $437,000,000 of inventory, an increase of $75,000,000 compared to the Q3 of fiscal 2022 and a sequential decrease of $56,000,000 compared to the Q2 of fiscal 2023. The increase in inventory compared to the prior year period was primarily related to core sanitizers. Consistent with our commentary last quarter, Inventory levels have peaked and we continue to look for opportunities to further reduce our inventory. During the Q3 and so far in the Q4, we have and we will continue to aggressively manage purchase orders and receipts. We expect to end fiscal 2023 with less inventory than we had at the end of fiscal 2022. Speaker 400:20:20At the end of the Q3 of fiscal 2023, we had $792,000,000 outstanding on our term loan facility compared to $800,000,000 at the end of the prior year period. The applicable rate on our term loan increased to LIBOR plus 2 75 basis points in the 3rd And our effective interest rate was 7.6% compared to an effective interest rate of 3.0% in the prior year. In June 2023, we amended our term loan credit agreement to replace the existing LIBOR based rate with a term SOFR based rate as an interest rate benchmark. Other material terms of the facility remain substantially unchanged, including the maturity date of March 2028. Our ABL and Term Loan agreements do not have quarterly financial maintenance covenants. Speaker 400:21:10Our outlook remains unchanged from the revised outlook we shared on July 13, the details of which are in today's earnings press As we only have one more quarter left in the fiscal year, I will be discussing each metric in the context of our implied 4th quarter outlook. Our Q4 outlook assumes a sales decline in the range of 9% to 14%, with comparable sales declines of 12% to 16%. Our outlook also assumes a gross margin range of 39.1 percent to 39.7% compared to 45.7% in the prior year period. In the Q4, we expect additional rate pressure from product costs, continued impact from occupancy cost deleverage, but a lower impact from distribution costs and business mix compared to what we experienced in the Q3. We expect 4th quarter adjusted EBITDA to be in the $61,000,000 to $71,000,000 range and adjusted diluted earnings per share to be in the 0.14 to $0.18 range. Speaker 400:22:10Our outlook for the Q4 includes interest expense of $17,000,000 and our diluted weighted average shares outstanding does not assume Our first priority is and has been our capital structure, and we are targeting a leverage ratio of approximately 3 turns. Our second priority is to invest in growth, both organically and through M and A. In the 1st 9 months of fiscal 2023, we invested 27,000,000 capital expenditures, and we deployed $16,000,000 towards acquisitions. Mike noted, we will continue to be prudent in our pursuit of M and A opportunities. Our focus remains on acquiring pool supply retailers in the Sunbelt, and we will be disciplined around acquiring high quality businesses at attractive purchase Our final priority is to return excess cash to shareholders. Speaker 400:23:06While we do not expect to repurchase shares in the near term under our existing authorization we focus on our other priorities, we will continue to evaluate opportunities to repurchase shares based on available investment opportunities, our financial position and market conditions. And with that, I will hand it over to Mike. Thank you. Speaker 200:23:25Thank you, Steve. Despite the challenging headwinds we are navigating in this highly unusual pool season, the aftermarket pool and spa industry has proven over time to be one of the most durable and advantaged consumer products categories, and we have a long track record of profitable growth in the industry. We remain laser focused on the execution of our long term growth initiatives, market share gains and shareholder returns. With that, I will hand it back to the operator for Q and A. Operator00:23:57Thank you. We will now be conducting a question and answer session. A confirmation One moment please while we open for questions. And our first question comes from Simeon Gutman with Morgan Stanley. Please go ahead. Speaker 500:24:38Good afternoon, everyone. My first question, Mike, you mentioned some market share from credit card data. Thanks for that. We don't see that data. So you adjusted your price, you said price is June 1. Speaker 500:24:54So my first question related to that is your product costs are much higher. You try you've taken price down because you weren't getting the sell through. Does that mean that a lot of the industry is Just accepting a much lower margin for selling product or chemicals. And then related to it is if you were holding or growing Share even in that scenario, which maybe you can parse out, then why even take down the price? Speaker 200:25:22Yes, Sumin, thanks for the questions and good questions. First on the margins, as we're active in M and A Especially retailers, we do see that we operate at higher margins than they do. And we can back that in pretty specifically to product cost And feel comfortable that we still have a cost advantage versus specialty retail, though we do need to say that that gap has narrowed from 2021 2022 when we had some, I would say, extraordinary advantaged prices on some core chemicals. With regards to market share, we look at market share in a couple of ways. The aggregated credit card data we use is Bank of America. Speaker 200:26:06As you can see on the slide, that shows we are basically flat to the industry in the quarter. We also listen very carefully to our pool peers and the largest distributor in the industry showed sell in to their pool specialty retail at minus 11%. So also a flat comparison to, I would say a flat growth rate and flat market share based on that comparison. Now look, that is That's a deceleration from the market share gains we've had consistently for the last 8 quarters. So we're not pleased with that, but That's the situation we are in with the Q4. Speaker 500:26:48And then a quick follow-up on margin. Pre COVID, we had a couple of years of, I guess, pre COVID history. It looks like our model says a 13% EBIT margin And now you have $500,000,000 and more in sales. So I know this is you've had a deceleration and it's hard to commit to where The clearing margin of this business is, I assume it's higher at least 13 on the sales base, but is there any reason why it shouldn't be? Or is there any reason it should be even higher than that 13? Speaker 200:27:24Look, I think we it's early to talk about 24. But In terms of where we were pre pandemic with our gross margins and our operating margins, We feel that the headwinds we've got this year and particularly in this quarter do abate and feel like we've got a pretty clear path to recover to those levels, at least those levels. Speaker 500:27:49Right. Okay. Thank you. Speaker 200:27:51Yes. Operator00:27:55Our next question comes from Steven Forbes with Guggenheim Securities. Please go ahead. Speaker 600:28:04Good evening. Mike, Steve, Scott. I wanted to maybe expand on Simeon's question, but in particular focus on the customer file dynamic. So Mike, maybe if you could just expand on your learnings from the quarter as it pertains to the customer file down 8% And specifically looking for any insight into what's really driving the reduction, right? Is it If the consumer is migrating back to maybe its legacy provider or outlet, is it marketplace disruption, is it mass? Speaker 600:28:36And on that also like when should we expect Leslie's to return to positive file growth? Speaker 200:28:45Yes, Stephen, thanks for the question. I think the way we're thinking about the file or the lack of File growth, file shrinking 8%. It has a lot to do with the 2 surveys that we ran, which showed a larger than normal amount of product left over in the industry in the consumers' hands. We've turned to calling it garage and shed inventory internally. And one of those surveys we conducted on our own through a third party And one after we pre released, we were contacted by one of our chemical partners who had run a similar survey of a similar size and come up with remarkably similar results. Speaker 200:29:33So we have some idea of what that size is now. And though they Came at the number in different ways. Again, the final impact in terms of a headwind is quite similar. So there's definitely some of that going on. And when you think about a needs based industry, Right. Speaker 200:29:54That's predominantly nondiscretionary spend. The question is, well, how can nondiscretionary spend be down? And nondiscretionary spend for the quarter was down 6%. Well, it's down it's only down if need is impacted. And 2 things impacted need in the quarter. Speaker 200:30:12The first was weather. It's coldest weather in a decade according to Plantalytics. Coldest weather in 19 years in June, the start of the pool season from Weather Trends International. So colder weather means less need for sanitizers, Means less people needing to come in and purchase and that impacts our file because our file is active members. And then when you look at The surveys that were conducted and found leftover inventory, which is first of all highly unusual, I'm going to say Unprecedented in our experience. Speaker 200:30:51That also decreases the need to purchase. We've We got some feedback from our stores that they were hearing that from customers as they were coming in, particularly with regards to our water tests. Even in a down quarter, we ran more water tests than the prior year's period, but the conversion of those tests was lower. And what we were hearing from the stores when we questioned it, it was that they were hearing that people had already had those chemicals. So It's a highly unusual situation. Speaker 200:31:24When we think of what the duration might be, I will say that both of those surveys, There was no mention from consumers in their self reporting that they had supplies that would last past the season. So we believe this is a 1 season occurrence based on 3 years of highly unstable supply and price inflation leading people to stockpile. Now the truth is we won't be able to know that for sure. Our way to size that will be with additional consumer surveys. We'll do them at the end of this season and we'll do them before the start of next season. Speaker 200:32:06And that'll be our way of Confirming that what we believe, which is what's which is that that extra inventory will be out of the out of consumers' hands by next pool season. Speaker 400:32:19And Tycho, as well, You answered the question with regard to non discretionary items. Given the discretionary decline as well, had a material impact on overall traffic. So That's another contributor if you get outside of the nondiscretionary product and look at the total decline in customer count. Speaker 200:32:41Yes, that's a good point. Thanks, Steve. Sorry. Speaker 600:32:46Maybe just a quick follow-up on pro, right, sort of A similar question, down 3%. But as we think about the growth in Pro Stores, we think about the growth in Pro Partner contracts On a year over year basis, anything specifically to note that helps explain what's transpiring within the Pro segment? Is that just Chemical mix or are you seeing some are you seeing less engagement from your affiliate contracts? Any color on the Pro segment would be helpful. Operator00:33:21Well, I Speaker 200:33:21would say that the probe business has become more competitive. And as some others have reported, we have seen Trichlor deflation in that category and that was a pretty significant headwind to the pro business in the quarter and year to date. Speaker 400:33:42Thank you. Operator00:33:51Our next question comes from Ryan Merkel with William Blair. Please go ahead. Speaker 700:33:58Thanks. Good afternoon. Mike, I was hoping you could address the risk that chemical prices keep falling. And have you seen competitors cut prices when you cut in June? Speaker 200:34:12Yes, Ryan. Thanks for the question. Yes, I think it's important to understand that the price actions we took on Sixone were to get ourselves level with specialty retail. And since we've done that, we haven't seen any reaction from specialty retail to take prices lower, list prices. In addition, we haven't seen any outsized promotional activity in the business. Speaker 200:34:38So right now, it looks like we have A stable pricing situation and a stable promotional environment in the residential pool space. Okay. That's good Speaker 700:34:52to hear. And then my follow-up, do you have any goals for inventory reduction, Cost savings and COGS, cost savings and SG and A that you can share with us? Speaker 200:35:07Yes, we're not sharing any specific inventory goals at this moment. As we said, Steve said in his script, we'll be lower than we were We're obviously working to work that number down as low as we can, but we haven't we're not going to comment on what our internal targets are. With regards to SG and A, as we talked about SG and A in my comments in the script, We look to be $15,000,000 to $20,000,000 lower in Q4 this year versus prior year. Also working diligently on reducing Cost run rate as we go into 2024 and we think we have a pretty good path there as well. Obviously, the inventory buildup and the associated costs with that, off-site storage, additional labor, increased transportation, those costs are in our margin. Speaker 200:36:03Those also were flexed up given the rather extraordinary inventory levels we took to ensure supply And we're unwinding those now. It will start in the Q4 and should be completed by the end of the year. That's helpful. Best of luck. Thanks. Operator00:36:26Our next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead. Speaker 800:36:34Hi, good afternoon, everyone. As you think about the sales decline of around 9% this quarter and you think about the cadence Going through as we go into the next fiscal year, are there any puts and takes of how you're planning the business and how you're thinking about Whether it's traffic, whether it's I. E. Transaction or discretionary or non discretionary, How you plan to market it or how you're reassorting the stores in order to minimize gross margin erosion and working to drive demand and seeing demand? Thank you. Speaker 200:37:10Yes, Dana, thanks for the question. Look, we start out each year planning whether to be Normal. This year was clearly an aberration of that. We do believe that weather should be at least neutral In a comparable basis, it should be a bit of a tailwind going in next year. The same with consumer inventory That gets worked through the channel. Speaker 200:37:32That should be a tailwind for us as well. The headwinds into next year in terms of sales is we got a little out of our normal lane in terms of pricing going into the quarter. We're a little bit above specialty retail. We've done that in the past and had those prices come up. We've been able to move up in price and have others follow. Speaker 200:37:55That didn't happen this year. So I think that's a good learning from us and we will keep our historical price position just below or equal to specialty and just above mass. And then as we think about additional puts and takes into next year, the in a needs based industry, the way we think about marketing is it doesn't drive need. Need comes from the installed base. It does drive market share gains. Speaker 200:38:24The challenge we've had with marketing this year is with the headwinds of weather and some excess inventory in the consumer channel, We weren't getting our typical ROI on marketing spend and therefore haven't been as aggressive. We would expect that to normalize next year. And then our ability to market at a hard spend marketing invest in marketing, sorry, at a high ROI should drive Should get us back on track with market share gains. Speaker 800:38:55Got it. And then just as you This quarter, was there any change in the quarterly progression or the cadence of the quarter? Speaker 200:39:08June was very tough in Q3 for us. I quoted that it was the toughest quarter overall In terms of weather from Plantalytics in a decade and Weather Trends International had it as coldest June in 19 years. So We came into the season as we always do waiting to see what kind of reaction we get over the Memorial Day weekend. And it was very disappointing just to see no lift in the business. And that's when we started both surveying customers, as well as speaking more directly to our District managers and store owners about what was going on and started to take the price actions that we did on Sixone. Speaker 200:39:53So it was a challenging traffic situation for the entirety of the quarter. Speaker 800:40:01Got it. Thank you. Operator00:40:06Our next question comes from Elizabeth Suzuki with Bank of America. Please go ahead. Speaker 900:40:13Great. Thank you very much. So I guess You mentioned you're seeing some of the same factors impacting the pro business as the retail business. I mean, does that include the pantry loading behavior of folks using chemicals they Stored up from last year. I mean, are PROs doing that too? Speaker 900:40:28And then is there anything you can do to educate customer about issues that they might experience if they're using expired chemicals? Speaker 200:40:37Yes, Liz, thanks. Good questions. We did not see that behavior on the pro side. Now our survey was just to residential consumers, but I don't believe we're seeing that on the pro side. I think the pros went into the season Believing that Trichlor pricing should come down, and they were correct. Operator00:40:59I Speaker 200:40:59think residential Consumers came out of last year wondering where price and where availability would be and ended up stockpiling based on the prior 2 years that they had experienced. Operator00:41:12I'm sorry. Go ahead. Speaker 200:41:16Was there a second part to your question? Sorry. Speaker 900:41:19No, just about like educating the customer about what could happen if they're using these older chemicals If there's anything from a marketing standpoint you can do to kind of get that message across. Speaker 200:41:33Yes, very good point. And yes, We're doing that in our blogs and that's why this is so unprecedented. It's not these are not chemicals you want to store. And look, it's predominantly trichlor and And Trichlor loses its efficacy, if not stored properly and will lose it within a year depending on temperature and ventilation. And Cal Hypo is a little more dramatic because the granular turns to solid and it also has combustible properties. Speaker 200:42:07So not something that consumers should be storing and not Operator00:42:21Our next question comes from Garik Shmois with Loop Capital Markets. Please go ahead. Speaker 1000:42:28Hi, thanks. You touched on the SG and A reductions that you're expecting in the Q4, dollars 15,000,000 in lower Costs compared to the prior year period. Just wondering if you could provide maybe some more color on the steps that you're taking and how you're viewing SG and A at this point is we're moving closer into fiscal 2024. Speaker 200:42:52Yes, Gary, good question. We're Look, the way we're thinking about SG and A is we're going to reduce it Both in Q4 and in our run rate into 2024 to help make our P and L more durable against some of the shocks that we experienced this quarter. And in terms specifically of SG and A areas we're addressing in the Q4 into next year, I can tell you overall, it's up and down the P and L. We spoke a little bit earlier about marketing. Marketing comes down naturally when we can't get the ROI that we expect on our investments. Speaker 200:43:31So marketing has come down in Q3 in Q4 and for the year, but we would expect that to recover in the next year when the consumer inventory is absent. With traffic being down as much as it has, driven by weather and consumer inventory, we've taken down labor hours in the stores accordingly. In terms of just being more efficient, we are de layering our corporate organization, More efficiency, more optimization. And then little things like travel, supplies, all out, All out push across those categories. And then finally, a big chunk of it is performance compensation. Speaker 200:44:14This is not a year where we will be paying ourselves or associates. Speaker 1000:44:22Understood. I wanted to follow-up on inorganic growth. Does the challenging environment right now change your view On either M and A or new store expansion? Speaker 200:44:37No, it doesn't because we think weather over time tends to And if consumers have inventory in their garages and sheds as it appears they do, that's a very unusual inventory are very unusual situation. And the catalyst for it, which is 3 years of spotty availability and increasing price, that catalyst is gone. Inventory is readily available. That's readily available across all sizes. So we would expect that to be transitory as well. Speaker 200:45:09And the challenges that we're facing in the quarter and this year, so is specialty retail. I think you can see that in some of the distributors results. So it actually makes M and A more attractive in terms of the multiples that we are able to execute against. But given the results in this quarter and our outlook for the year, As we said in our prepared remarks, we're going to be prudent about it and we're going to watch the pace of M and A, but we still think it's an important initiative for Lesley, it's over the long term. Speaker 1000:45:46Okay, understood. Thanks again. Speaker 200:45:48Yes. Operator00:45:52Our next question comes from Jonathan Matuszewski with Jefferies. Please go ahead. Speaker 700:45:59Hey, good afternoon. Thanks for taking my questions. The first one was on pricing actions. Mike, I think you mentioned The guidance assumes no change in pricing. Is there anything that would lead you to deviate from current pricing? Speaker 700:46:15I guess another way of asking, if traffic or transaction is softer, would you further reduce pricing to try and Dem, the excess transaction decline? Thanks. Yes. Speaker 200:46:29When I said no change in current pricing in the prepared remarks, That was specifically for 4 Pro where we have seen some Tricore pricing come down, offset a little bit by Cal Hypo, which is up. In terms of residential, I think currently we view the demand in the industry At this moment, that's fairly inelastic. Now when we think about what's driving the traffic declines And the traffic declines we don't think are being driven by price sensitivity. They're being driven by weather, and consumer inventory, which we believe are transitory. So we need to wait those out. Speaker 200:47:12The price actions we took was because We had gotten, as I mentioned, above specialty retail and that's not a position that our consumers are used to seeing us in and not one that we want to be in. So we took our actions on Sixone. We lined up with the industry. We are where we want to be from a price standpoint. And now we need to let this year play out, the weather normalize, Consumer inventory normalized and we should be back to our regular cadence of growth. Speaker 700:47:47Got you. That's helpful. And then just my follow-up, it sounds like the customer insights work picked up on some price sensitivity. Curious to what extent you think equipment upgrades and related spend that didn't materialize In the second half of this year could potentially benefit revenue next year? Thanks. Speaker 200:48:12Yes, it's also a good question. Just the general macroeconomic situation, You hear customer price sensitivity across industries. In the surveys in the survey that we did and the one that we had access to, It was also mentioned very specifically by customers. And I just think that look, I think the entire industry took an awful lot price over the last 3 years and there is still cost pressures. So there's some opportunity to take price. Speaker 200:48:46I think the industry is going to be very mindful and thoughtful about how much price we take because we certainly don't want to create any demand destruction. I think when you look at the equipment business, we reported ours was down 8%. I think Pool Corp reported theirs was down 8% as well. That's predominantly volume at the moment. And I think the read on that is that, Yes, people with certain heightened sense of price sensitivity might be delaying some upgraded purchases, But certainly the Brake Fix business, that is durable and continuing on. Speaker 400:49:31Best of luck. Speaker 200:49:33Thanks. Operator00:49:37Our next question comes from Andrew Carter with Stifel. Please go ahead. Speaker 1100:49:43Yes. Hey, thank you. So a couple of questions I wanted to ask really about visibility into the business. First is in terms of pricing, like Getting out over your skis relative to specialty retail, I mean, how good are your real time insights into kind of your price levels? I know you do channel checks, But is can a customer a DIYer, I don't know that they get listened to if they say, hey, it's cheaper down Street and second to that, how quickly do you respond to feedback? Speaker 1100:50:09And then just a second kind of point, putting all the consumer work survey work Saad, have you looked at considering how many pounds of chemicals went out the door from various locations over the last 4 years? And what a reversion to the mean would look like considering market share gains, just to kind of give you a sense of where you actually where you could land? Thanks. Speaker 200:50:32Yes. Thanks, Andrew. So a few questions in there. I'll talk about price visibility first and how we think about price. We in 2021 2022, we were able to influence pricing in the residential market. Speaker 200:50:48We came into the preseason, I would say, April, May period, kind of pushing price, taking price and had the market follow us. When we went in this year, our pricing coming into the quarter and into the year was our Q4 pricing. So our intent was to hold that pricing for the balance of this year. We knew prior to Memorial Day that our pricing was a little above specialty. We thought specialty might come up and meet us. Speaker 200:51:23They did not. And it was after that on sixone that we took our price actions. And we have good visibility in the pricing. I mean, we understood what that dynamic was. We thought we'd be able to move price up and we weren't able to. Speaker 200:51:38We use a combination of web scraping And with over 1,000 stores and store managers and DMs out there, we have a fairly fulsome Ability to track our mom and pop competitors as well. And then I think on the last question about the pounds analysis, we are looking at that. I think the surveys we did were not specific to Leslie's. And we think that's an important component of How we think about the headwind it created for this year because our growth as you know is a combination of comp growth in a typical year, but also market share gains and both become more difficult when there is excess inventory in the channel. I'll go Speaker 1100:52:34ahead and pass it on since I asked to. Thanks. Operator00:52:44Our next question comes from Peter Benedict with Robert W. Baird. Please go ahead. Speaker 1200:52:52Yes, good afternoon, guys. It's Justin Kleber on for Pete. Mike, I just wanted to ask, I imagine you're having discussions Today with your vendors regarding the 2024 policies. I'm just curious what does the costing backdrop look like sitting here today, particularly on these nondiscretionary Products, do you think product costs are still going to move higher next year? Just trying to understand this product margin pressure, Could it linger if you and the industry just can't pass through any more price? Speaker 1200:53:22That's my first question. Yes. Speaker 200:53:25I appreciate the question. It's too early for us to talk about that. We have not really started price discussions with our vendors yet. Typically that takes place 30 to 60 days from now. Yes, I think it's important for both sides to understand kind of how the season wraps up a little further through our Q4 and their Q3. Speaker 200:53:50And then we will sit down and talk about the dynamics that we see. There's certainly some cost pressure, but I think there's also After 3 years of consumers absorbing a lot of inflation, there's definitely some more price sensitivity from customers. I mean, We have 85,000 consumers a day coming through our doors and our stores. We are ears to the ground, I would say, The first line I'm hearing from consumers. And I think the message has been pretty clear that their appetite for continuous price increases is a little more nuanced than it has been in the past. Speaker 1200:54:34Got it. Okay. Now that makes sense. And then an unrelated follow-up on leverage. Steve mentioned the 3 times target. Speaker 1200:54:41In terms of the path to get there, is that more about natural deleverage as EBITDA recovers and starts to grow again? Or Are you foregoing some store growth and M and A opportunities in the near term and deploying capital into debt paydown? Speaker 400:54:59Yeah. Thanks for the question, Justin. I think there's a couple of different ways to think about it. We would expect to reduce leverage by combination of growth in the business, so just naturally and potentially allocate some cash towards debt pay down. If you think about cash flow for this year, it's been impacted By working capital primarily, if you look at our CapEx, that's kind of in line with how we talked about it. Speaker 400:55:24We talked about kind of a 3% of total sales, Coming a little shy of that this year, from an M and A perspective, certainly slower pace this year from a dollars perspective, but continue to do Attractive deals and acquire businesses at great multiples. I expect that to continue through Q4 as well at a modest clip. And so when it comes down to 2023, you think about the cadence for working capital last year. We were buying a lot of inventory late in the season, Led to accounts payable and other accrued expenses that ended up getting paid off in the Q1 of 2023. At this point, we've talked about bringing inventory down pretty aggressively in the year end. Speaker 400:56:04But as a result, we'll have lower accounts payable and certainly So don't expect a big cash flow year in 'twenty three, but do you see opportunity for improvement in 2024, which could lead us to continue to deploy capital towards debt paydown as well as invest in stores and M and A. Last comment I'd make on that, as you think about new store growth, fairly modest capital requirements for a new store location or a conversion as we convert stores to pros. And if you look at the M and A that we're executing in the current environment, it's a lot of Retailers in the Sunbelt, smaller locations, it's not a big cash drain from an M and A perspective. So But clear opportunity to continue to deploy capital towards growth, but it will probably look a little different than it has the last couple of Operator00:57:06There are no further questions at this time. I would like to turn the floor back over to the management for closing comments. Please go ahead. Speaker 200:57:16Yes. I'd like to thank everybody for joining us today and your continued interest in Leslie's.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallLeslie's Q3 202300:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) Leslie's Earnings HeadlinesBeyond the Gates Preview: Leslie and Nicole Are Headed for an Explosive Showdown, and ‘Honey, You Ain't Seen Nothing Yet'May 8 at 5:00 AM | msn.comLeslies Inc Ordinary SharesMay 7 at 12:52 AM | morningstar.comWhite House to reset Social Security?Elon Musk's parting DOGE gift looks set to shock America... A single announcement by July 22nd could soon bring Elon Musk's DOGE operation to its final, dramatic conclusion - with huge consequences for millions of investors. So if you have any money in the market... you're almost out of time to prepare. This plan has already been put in place... and can operate even if Elon's long gone from Washington. May 8, 2025 | Altimetry (Ad)Leslie's to Release Fiscal 2025 Second Quarter Financial Results on May 8, 2025April 30, 2025 | globenewswire.comMusic Industry Moves: Nashville Vet Leslie Fram Launches FEMco Consulting; Joshua Simons, Dave Lory and Dick Wingate Announce Worldwide Entertainment GroupApril 29, 2025 | msn.comThe Daily Y.A.P.P For Beyond the Gates, April 28th: Leslie's hidden agendaApril 29, 2025 | msn.comSee More Leslie's Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Leslie's? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Leslie's and other key companies, straight to your email. Email Address About Leslie'sLeslie's (NASDAQ:LESL) operates as a direct-to-consumer pool and spa care brand in the United States. The company markets and sells pool and spa supplies and related products and services. It also offers various pool and spa maintenance items, such as chemicals, equipment and parts, cleaning and maintenance equipment, safety, recreational, and fitness related products. In addition, the company provides installation and repair services for pool and spa equipment. It also sells its products through e-commerce websites and third-party marketplaces. The company offers complimentary, commercial-grade in-store, water testing, and analysis services. It serves the residential, professional, and commercial consumers. Leslie's, Inc. was founded in 1963 and is based in Phoenix, Arizona.View Leslie's ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Disney Stock Jumps on Earnings—Is the Magic Sustainable?Archer Stock Eyes Q1 Earnings After UAE UpdatesFord Motor Stock Rises After Earnings, But Momentum May Not Last Broadcom Stock Gets a Lift on Hyperscaler Earnings & CapEx BoostPalantir Stock Drops Despite Stellar Earnings: What's Next?Is Eli Lilly a Buy After Weak Earnings and CVS-Novo Partnership?Is Reddit Stock a Buy, Sell, or Hold After Earnings Release? 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There are 13 speakers on the call. Operator00:00:00As a reminder, this conference call is being recorded and will be available for replay later today on the company's website. I will now turn the call over to Kathleen Turffield, Investor Relations. Please go ahead. Speaker 100:00:17Thank you, and good afternoon. I would like to remind everyone that comments made today may include forward looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. During the call today, management may refer to certain non GAAP financial measures. Speaker 100:00:50A reconciliation between the GAAP and non GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir. Lesleyspool.com. On the call today from Leslie's are Mike Ejek, Chief Executive Officer Steve Waddell, Chief Financial Officer and Scott Bowman, Chief Financial Officer Designate. With that, I will turn the call over to Mike. Mike? Speaker 200:01:19Thanks, Caitlin, and good afternoon, everyone. Thank you for joining us. Please note that we have posted a Q3 2023 earnings deck to the Lesley's IR site and that we will be referring to certain pages in that deck during our call. As we shared in our pre release 3 weeks ago, it was a difficult quarter. Low double digit traffic declines resulted in a 12% comparable sales decline and a 9% total sales decline. Speaker 200:01:46In addition to fixed cost deleverage associated with these sales, We faced unexpected in season product cost increases and higher distribution expenses that significantly impacted gross margins for the quarter. Our ongoing analysis points to 3 primary drivers of our Q3 traffic and sales results. The first is weather. Our weather reporting service, Planalytics, calculated that weather was a 5% year over year headwind to sales in the quarter. Weather headwinds were felt across most of our store base and most significantly in California, Texas and Arizona. Speaker 200:02:21The weather in Florida was relatively normal in the quarter as it has been all year and our business in Florida significantly outperformed in the quarter year to date. Sales in Florida were plus high single digits in the quarter and are plus mid teens year to date. The second driver was increased consumer price sensitivity. After 3 years of significant price inflation, consumers were not willing to absorb price increases during the quarter. This prevented us from taking the pricing actions required to maintain margins as product costs increased and also prevented us from maintaining our pre June 1st Pricing on core chemicals. Speaker 200:02:59As we have discussed before, we generally aim to maintain a relative price point that is above mass and just below specialty. That relative price position was out of balance for some weeks in the Q3, which we addressed with our June 1 price actions. Those actions resulted in essentially flat year over year chemical pricing despite higher costs. And the 3rd driver was that a portion of our customers had a greater than normal amount of chemicals left over from last year. This driver was validated by 2 separate consumer surveys, 1 conducted on our behalf and another that was conducted on behalf of 1 of our chemical partners. Speaker 200:03:38This consumer behavior is not something we have seen before and was surprising given the hazardous nature and useful life of these chemicals. Transactions were down 12% in the quarter, reflecting double digit traffic declines that offset solid conversion rates. Average order value increased 3%. The traffic decline was broad based and impacted both nondiscretionary and discretionary product sales. For the quarter, non discretionary sales were down 6% and discretionary sales were down 24%. Speaker 200:04:13Total chemical sales for the quarter were down 6% as increases in Cal Hypo and Select Specialty Chemicals partially offset a 16% decrease in TRICORE sales. Equipment sales were down 8% in the quarter, driven primarily by volume. The decrease in discretionary product sales was driven by hot tubs and aboveground pools as macro factors continue to impact demand for these highly discretionary high ticket items. Non comp sales contributed plus 3% to the quarter, driven by acquisitions and new store builds. The data we analyze suggest that the top line trends we are seeing are an industry wide issue. Speaker 200:04:57Aggregated credit card For the pool supplies retail category on Slide 7 indicates that the industry sales ex Leslie's were down 7.1% for the quarter. Based on total company sales, our declines were 220 basis points more than the category for Q3. That said, aggregated credit card data for the pool supplies retail category does not include hot And when we adjust out those 2 categories from our sales for a more comparable review, Leslie's performed slightly better than the industry. We are clearly experiencing a highly unusual pool season following 3 years of strong growth. However, the long term fundamental advantages The pool industry remains the same. Speaker 200:05:43New pools continue to be built and the growing installed base of pools need to be maintained. As you can see on Slide 8, the industry has a long track record of consistent growth and Leslie's has consistently grown faster than the industry. So while our team navigates the current industry headwinds, we also remain focused on executing the key strategic initiatives that underpin our competitive advantages and that will continue to drive our long term success as industry conditions normalize. Turning to our strategic growth initiatives. 1st, given the traffic challenges in the quarter, our customer file was down 8% versus the prior year's quarter. Speaker 200:06:352nd, average revenue per customer was down 1% in the quarter, driven primarily by decreases in big ticket items, specifically hot tubs and above ground pools. Our Pool Perks loyalty members continue to outperform. Loyalty member sales were down 3% in the quarter. With regard to our PRO initiatives, We ended the quarter with more than 3,700 Pro contracts in place and completed the conversion of 15 residential stores to our PRO format prior to the start of the season. We currently operate 98 PRO locations. Speaker 200:07:12Pro consumer group sales declined 3% in the quarter with comp sales down 13% as our pro comps were impacted by the same factors as our overall business. In addition, Tricore pricing has been more pressured on the pro side as compared to the residential channel and contributed an outsized headwind to our overall gross margin performance. Our guidance for the remainder of the year assumes no change from current pricing levels. M and A and new store growth remain an important initiative for Leslie's, though we will be prudent with the pace of this initiative in the near term as we balance it against our other capital allocation priorities. M and A and new stores grew up $16,000,000 to non comp sales in the quarter. Speaker 200:07:57We also completed 2 acquisitions in the quarter that added 5 locations in the Sunbelt. Year to date, we have closed 5 acquisitions that added 12 locations and we have another acquisition under LOI. In the quarter, we opened 7 new stores, bringing the year to date total to 12. We remain confident in the total store expansion available to Leslie's over the long term and have identified over 800 opportunities for store densification. We will continue to address each of these opportunities with a buy or build analysis. Speaker 200:08:32For Accu Bull Home, We were pleased to launch the program in May and have been very pleased with the consumer response and demand we have seen to date, all despite nominal marketing. While demand has been strong, we are facing supply chain constraints as we ramp up, and we are working with our vendor to increase production in order to meet consumer demand. With regards to our outlook, Our guidance for Q4 assumes no improvement to the top line trends we experienced in Q3. For gross margin, we expect Q4 to have a full quarter impact from the chemical price actions we took on June 1, which will be partially offset by the wind down of distribution costs associated with our peak inventory levels. We have also aggressively initiated cost management actions that coupled with some unique SG and A comparisons should result in Q4 SG and A being approximately $15,000,000 to $20,000,000 lower versus the prior year quarter. Speaker 200:09:32In summary, we continue to have confidence in the long term outlook for the industry and we remain focused on prudently executing our strategic initiatives to capture the opportunities in front of us and further our industry leadership. At the same time, we are focused on taking immediate actions to improve our performance. Let me reiterate the actions we are taking. Number 1, we have adjusted pricing to reflect current market conditions and are now at our relative historical price position, which is slightly above mass and home improvement and at or slightly below specialty retailers. Number 2, we are aggressively managing inventory through receipt reductions. Speaker 200:10:15Number 3, we are focused on cost management throughout the P and L, including being disciplined on our marketing investments, utilizing strict ROI criteria. Number 4, we continue to evaluate, develop and elevate our processes and people. And number 5, We are enhancing our consumer insight efforts to further improve our understanding of evolving consumer behavior. Before Steve discusses our results and outlook, I want to acknowledge our CFO transition. I'm very pleased to welcome Scott Bowman as our new CFO effective August 7. Speaker 200:10:52Scott's depth and breadth of public company experience spans both financial and operational areas and will be a huge asset as we return the business to growth. I would also like to thank Steve for his leadership and partnership as well as his commitment to ensuring a smooth transition. I'll turn it over to Scott to say a few words. Speaker 300:11:13Thank you, Mike. Lesley's has carved out an admirable leadership position in an attractive industry and based on my initial observations, I see plenty of areas where I can leverage my experience to help drive Lesley's strategic priorities. As I continue getting up to speed on the business, I look forward to digging into areas such as supply chain, product margin management, forecasting and capital allocation to help deliver continuous improvement in the business. It's an exciting time to join the team as we drive the next chapter of the company's growth, and I look forward to speaking with all of you in the coming weeks months. Now, I'll turn it over to Steve to share more detail on the Q3 financial results and outlook. Speaker 400:11:54Good afternoon, everyone, and thank you, Mike and Scott. While we have seen slow starts to pool season in prior years due to unfavorable weather conditions, historically performance has improved around Memorial Day. This year, our Q3 performance was impacted by industry wide headwinds due in part to continued unfavorable weather along with atypical consumer For the Q3, we reported sales of $611,000,000 a decrease of 9% or $63,000,000 when compared to the Q3 of fiscal 2022. Our comparable sales decreased 12% for $79,000,000 Our comparable sales on a 2 year stack basis decreased 4% and on a 3 year stack basis grew 15%. Our non comparable sales totaled $16,000,000 in the Q3 of fiscal 2023, which was driven by 9 completed acquisitions that added 25 stores as well as 19 net new store openings since the end of the Q2 of fiscal 2022. Speaker 400:13:03With respect to trends by consumer group, comparable sales declined 10% for residential pool, 13% for pro pool and 23% for residential hot tub. On a 2 year stack basis, comparable sales declined to 5% for residential pool, increased 4% for Pro Pool and declined 7% for residential hot tub. While our 3rd quarter sales The declines were unprecedented. They were in line with industry trends. Gross profit decreased 17% or $52,000,000 compared to the Q3 of fiscal 2022 and gross margin rate was down 390 basis points to 41.2% from 45.1% in the prior year period. Speaker 400:13:47Page 11 of our supplemental deck illustrates our Q3 gross margin rate bridge in more detail. During the quarter, gross margins were impacted by 4 primary factors. 1st, incremental distribution expenses, including those related to capitalized distribution costs and investments in labor, off-site storage and transportation costs, lowered gross margin by 150 basis points. Approximately 50 basis points of this rate decline was due to deleverage of fixed Distribution costs from lower comparable sales. Regarding higher capitalized costs, as we built up inventory in prior periods, We capitalized more distribution costs and during this quarter, we recognized some of those costs as we sold through the inventory. Speaker 400:14:30We have also continued to invest in our distribution network to ensure it operated smoothly at significantly higher capacities with improved service levels to support better in stock positions across our businesses. We expect the gross margin headwind from distribution expenses to be smaller in the 4th quarter. 2nd, higher product costs had a 140 basis point impact on gross margins in the quarter. While we experienced higher product costs across categories, The largest impact was in our chemicals categories. We initially increased our selling prices for chemicals at the start of the season, but we were unable to successfully maintain those higher pricing levels. Speaker 400:15:09And as Mike discussed, we reduced prices on June 1. We expect greater product margin rate pressure in the Q4 as we experience a full quarter impact of those price changes. 3rd, occupancy and other costs deleveraged by 70 basis points predominantly due to the decline in comparable sales. We expect continued rate pressure in the Q4 related to occupancy and other costs deleverage given our comparable sales expectations. And finally, business mix impacted gross margins by 30 basis points, primarily due to M and A completed during the last 12 months. Speaker 400:15:45We expect a smaller impact on rate from business mix in the Q4. Looking at the numbers in a different way, Deleverage of fixed costs impacted gross margin rate by 115 basis points in the quarter, with the remaining 275 basis points of margin compression due to lower product margin, higher distribution costs and business mix. Now I'll turn to SG and A. SG and A increased 3% or $4,000,000 compared to the Q3 of fiscal 2022. We continue to focus on managing costs in the business, Generating cost savings and driving ongoing organizational optimization. Speaker 400:16:22During the quarter, we were able to partially offset higher SG and A Acquired businesses and new stores, investments in our associates and non recurring costs with $6,000,000 of like for like expense reductions compared to last year. We have taken additional actions to reduce our SG and A in the Q4 and into fiscal 2024. Adjusted EBITDA was $129,000,000 compared to $183,000,000 in the prior year. Interest expense increased to $18,000,000 during the quarter from $7,000,000 in the prior year and our effective tax rate increased to 26.1% compared to 25.7% in the prior year. Adjusted net income was $76,000,000 in the Q3 of fiscal 2023 compared to adjusted net income of $126,000,000 in the prior year. Speaker 400:17:12And adjusted diluted earnings per share was $0.41 in the Q3 of fiscal 2023 compared to $0.68 in the prior year. Diluted weighted average shares outstanding were 185,000,000 in both the Q3 of fiscal 2023 and fiscal 2022. Now I'll turn to year to date results. Total sales for the 1st 9 months of fiscal 2023 decreased $68,000,000 or to $1,019,000,000 from $1,087,000,000 in the prior year. Our comparable sales decreased 11% or $118,000,000 On a 2 3 year stack basis, our comparable sales were flat and up 23%, respectively. Speaker 400:17:57Gross profit for the 1st 9 months of fiscal 2023 decreased 15% were $69,000,000 to $388,000,000 from $457,000,000 in the prior year. Gross margin rate decreased by 390 basis points to 38.1 percent from 42.0 percent in the prior year, of which 140 basis points was due to negative comparable sales growth in the first 9 months of fiscal 2023. Adjusted EBITDA was $109,000,000 in the 1st 9 months of fiscal 2023 compared to $193,000,000 in the prior year. Interest expense increased to $48,000,000 during the 1st 9 months of fiscal 2023 from $21,000,000 in the prior year. Adjusted net income was $25,000,000 in the 1st 9 months of fiscal 2023 compared to $112,000,000 in the prior year. Speaker 400:18:50And adjusted diluted earnings per share was $0.14 in the 1st 9 months of fiscal 2023 compared to $0.60 in the prior year. Moving to the balance sheet. We finished the Q3 of fiscal 2023 Cash of $19,000,000 and we had $31,000,000 outstanding on our ABL. This compares to cash of $193,000,000 and no amounts outstanding on our ABL at the end of the Q3 of fiscal 2022. The reduction in net cash was primarily due to investments in inventory and higher M and A activity during the past 12 months. Speaker 400:19:24Currently, we do not have any amount outstanding on our ABL and we have availability of approximately 240,000,000 We ended the Q3 of fiscal 2023 with $437,000,000 of inventory, an increase of $75,000,000 compared to the Q3 of fiscal 2022 and a sequential decrease of $56,000,000 compared to the Q2 of fiscal 2023. The increase in inventory compared to the prior year period was primarily related to core sanitizers. Consistent with our commentary last quarter, Inventory levels have peaked and we continue to look for opportunities to further reduce our inventory. During the Q3 and so far in the Q4, we have and we will continue to aggressively manage purchase orders and receipts. We expect to end fiscal 2023 with less inventory than we had at the end of fiscal 2022. Speaker 400:20:20At the end of the Q3 of fiscal 2023, we had $792,000,000 outstanding on our term loan facility compared to $800,000,000 at the end of the prior year period. The applicable rate on our term loan increased to LIBOR plus 2 75 basis points in the 3rd And our effective interest rate was 7.6% compared to an effective interest rate of 3.0% in the prior year. In June 2023, we amended our term loan credit agreement to replace the existing LIBOR based rate with a term SOFR based rate as an interest rate benchmark. Other material terms of the facility remain substantially unchanged, including the maturity date of March 2028. Our ABL and Term Loan agreements do not have quarterly financial maintenance covenants. Speaker 400:21:10Our outlook remains unchanged from the revised outlook we shared on July 13, the details of which are in today's earnings press As we only have one more quarter left in the fiscal year, I will be discussing each metric in the context of our implied 4th quarter outlook. Our Q4 outlook assumes a sales decline in the range of 9% to 14%, with comparable sales declines of 12% to 16%. Our outlook also assumes a gross margin range of 39.1 percent to 39.7% compared to 45.7% in the prior year period. In the Q4, we expect additional rate pressure from product costs, continued impact from occupancy cost deleverage, but a lower impact from distribution costs and business mix compared to what we experienced in the Q3. We expect 4th quarter adjusted EBITDA to be in the $61,000,000 to $71,000,000 range and adjusted diluted earnings per share to be in the 0.14 to $0.18 range. Speaker 400:22:10Our outlook for the Q4 includes interest expense of $17,000,000 and our diluted weighted average shares outstanding does not assume Our first priority is and has been our capital structure, and we are targeting a leverage ratio of approximately 3 turns. Our second priority is to invest in growth, both organically and through M and A. In the 1st 9 months of fiscal 2023, we invested 27,000,000 capital expenditures, and we deployed $16,000,000 towards acquisitions. Mike noted, we will continue to be prudent in our pursuit of M and A opportunities. Our focus remains on acquiring pool supply retailers in the Sunbelt, and we will be disciplined around acquiring high quality businesses at attractive purchase Our final priority is to return excess cash to shareholders. Speaker 400:23:06While we do not expect to repurchase shares in the near term under our existing authorization we focus on our other priorities, we will continue to evaluate opportunities to repurchase shares based on available investment opportunities, our financial position and market conditions. And with that, I will hand it over to Mike. Thank you. Speaker 200:23:25Thank you, Steve. Despite the challenging headwinds we are navigating in this highly unusual pool season, the aftermarket pool and spa industry has proven over time to be one of the most durable and advantaged consumer products categories, and we have a long track record of profitable growth in the industry. We remain laser focused on the execution of our long term growth initiatives, market share gains and shareholder returns. With that, I will hand it back to the operator for Q and A. Operator00:23:57Thank you. We will now be conducting a question and answer session. A confirmation One moment please while we open for questions. And our first question comes from Simeon Gutman with Morgan Stanley. Please go ahead. Speaker 500:24:38Good afternoon, everyone. My first question, Mike, you mentioned some market share from credit card data. Thanks for that. We don't see that data. So you adjusted your price, you said price is June 1. Speaker 500:24:54So my first question related to that is your product costs are much higher. You try you've taken price down because you weren't getting the sell through. Does that mean that a lot of the industry is Just accepting a much lower margin for selling product or chemicals. And then related to it is if you were holding or growing Share even in that scenario, which maybe you can parse out, then why even take down the price? Speaker 200:25:22Yes, Sumin, thanks for the questions and good questions. First on the margins, as we're active in M and A Especially retailers, we do see that we operate at higher margins than they do. And we can back that in pretty specifically to product cost And feel comfortable that we still have a cost advantage versus specialty retail, though we do need to say that that gap has narrowed from 2021 2022 when we had some, I would say, extraordinary advantaged prices on some core chemicals. With regards to market share, we look at market share in a couple of ways. The aggregated credit card data we use is Bank of America. Speaker 200:26:06As you can see on the slide, that shows we are basically flat to the industry in the quarter. We also listen very carefully to our pool peers and the largest distributor in the industry showed sell in to their pool specialty retail at minus 11%. So also a flat comparison to, I would say a flat growth rate and flat market share based on that comparison. Now look, that is That's a deceleration from the market share gains we've had consistently for the last 8 quarters. So we're not pleased with that, but That's the situation we are in with the Q4. Speaker 500:26:48And then a quick follow-up on margin. Pre COVID, we had a couple of years of, I guess, pre COVID history. It looks like our model says a 13% EBIT margin And now you have $500,000,000 and more in sales. So I know this is you've had a deceleration and it's hard to commit to where The clearing margin of this business is, I assume it's higher at least 13 on the sales base, but is there any reason why it shouldn't be? Or is there any reason it should be even higher than that 13? Speaker 200:27:24Look, I think we it's early to talk about 24. But In terms of where we were pre pandemic with our gross margins and our operating margins, We feel that the headwinds we've got this year and particularly in this quarter do abate and feel like we've got a pretty clear path to recover to those levels, at least those levels. Speaker 500:27:49Right. Okay. Thank you. Speaker 200:27:51Yes. Operator00:27:55Our next question comes from Steven Forbes with Guggenheim Securities. Please go ahead. Speaker 600:28:04Good evening. Mike, Steve, Scott. I wanted to maybe expand on Simeon's question, but in particular focus on the customer file dynamic. So Mike, maybe if you could just expand on your learnings from the quarter as it pertains to the customer file down 8% And specifically looking for any insight into what's really driving the reduction, right? Is it If the consumer is migrating back to maybe its legacy provider or outlet, is it marketplace disruption, is it mass? Speaker 600:28:36And on that also like when should we expect Leslie's to return to positive file growth? Speaker 200:28:45Yes, Stephen, thanks for the question. I think the way we're thinking about the file or the lack of File growth, file shrinking 8%. It has a lot to do with the 2 surveys that we ran, which showed a larger than normal amount of product left over in the industry in the consumers' hands. We've turned to calling it garage and shed inventory internally. And one of those surveys we conducted on our own through a third party And one after we pre released, we were contacted by one of our chemical partners who had run a similar survey of a similar size and come up with remarkably similar results. Speaker 200:29:33So we have some idea of what that size is now. And though they Came at the number in different ways. Again, the final impact in terms of a headwind is quite similar. So there's definitely some of that going on. And when you think about a needs based industry, Right. Speaker 200:29:54That's predominantly nondiscretionary spend. The question is, well, how can nondiscretionary spend be down? And nondiscretionary spend for the quarter was down 6%. Well, it's down it's only down if need is impacted. And 2 things impacted need in the quarter. Speaker 200:30:12The first was weather. It's coldest weather in a decade according to Plantalytics. Coldest weather in 19 years in June, the start of the pool season from Weather Trends International. So colder weather means less need for sanitizers, Means less people needing to come in and purchase and that impacts our file because our file is active members. And then when you look at The surveys that were conducted and found leftover inventory, which is first of all highly unusual, I'm going to say Unprecedented in our experience. Speaker 200:30:51That also decreases the need to purchase. We've We got some feedback from our stores that they were hearing that from customers as they were coming in, particularly with regards to our water tests. Even in a down quarter, we ran more water tests than the prior year's period, but the conversion of those tests was lower. And what we were hearing from the stores when we questioned it, it was that they were hearing that people had already had those chemicals. So It's a highly unusual situation. Speaker 200:31:24When we think of what the duration might be, I will say that both of those surveys, There was no mention from consumers in their self reporting that they had supplies that would last past the season. So we believe this is a 1 season occurrence based on 3 years of highly unstable supply and price inflation leading people to stockpile. Now the truth is we won't be able to know that for sure. Our way to size that will be with additional consumer surveys. We'll do them at the end of this season and we'll do them before the start of next season. Speaker 200:32:06And that'll be our way of Confirming that what we believe, which is what's which is that that extra inventory will be out of the out of consumers' hands by next pool season. Speaker 400:32:19And Tycho, as well, You answered the question with regard to non discretionary items. Given the discretionary decline as well, had a material impact on overall traffic. So That's another contributor if you get outside of the nondiscretionary product and look at the total decline in customer count. Speaker 200:32:41Yes, that's a good point. Thanks, Steve. Sorry. Speaker 600:32:46Maybe just a quick follow-up on pro, right, sort of A similar question, down 3%. But as we think about the growth in Pro Stores, we think about the growth in Pro Partner contracts On a year over year basis, anything specifically to note that helps explain what's transpiring within the Pro segment? Is that just Chemical mix or are you seeing some are you seeing less engagement from your affiliate contracts? Any color on the Pro segment would be helpful. Operator00:33:21Well, I Speaker 200:33:21would say that the probe business has become more competitive. And as some others have reported, we have seen Trichlor deflation in that category and that was a pretty significant headwind to the pro business in the quarter and year to date. Speaker 400:33:42Thank you. Operator00:33:51Our next question comes from Ryan Merkel with William Blair. Please go ahead. Speaker 700:33:58Thanks. Good afternoon. Mike, I was hoping you could address the risk that chemical prices keep falling. And have you seen competitors cut prices when you cut in June? Speaker 200:34:12Yes, Ryan. Thanks for the question. Yes, I think it's important to understand that the price actions we took on Sixone were to get ourselves level with specialty retail. And since we've done that, we haven't seen any reaction from specialty retail to take prices lower, list prices. In addition, we haven't seen any outsized promotional activity in the business. Speaker 200:34:38So right now, it looks like we have A stable pricing situation and a stable promotional environment in the residential pool space. Okay. That's good Speaker 700:34:52to hear. And then my follow-up, do you have any goals for inventory reduction, Cost savings and COGS, cost savings and SG and A that you can share with us? Speaker 200:35:07Yes, we're not sharing any specific inventory goals at this moment. As we said, Steve said in his script, we'll be lower than we were We're obviously working to work that number down as low as we can, but we haven't we're not going to comment on what our internal targets are. With regards to SG and A, as we talked about SG and A in my comments in the script, We look to be $15,000,000 to $20,000,000 lower in Q4 this year versus prior year. Also working diligently on reducing Cost run rate as we go into 2024 and we think we have a pretty good path there as well. Obviously, the inventory buildup and the associated costs with that, off-site storage, additional labor, increased transportation, those costs are in our margin. Speaker 200:36:03Those also were flexed up given the rather extraordinary inventory levels we took to ensure supply And we're unwinding those now. It will start in the Q4 and should be completed by the end of the year. That's helpful. Best of luck. Thanks. Operator00:36:26Our next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead. Speaker 800:36:34Hi, good afternoon, everyone. As you think about the sales decline of around 9% this quarter and you think about the cadence Going through as we go into the next fiscal year, are there any puts and takes of how you're planning the business and how you're thinking about Whether it's traffic, whether it's I. E. Transaction or discretionary or non discretionary, How you plan to market it or how you're reassorting the stores in order to minimize gross margin erosion and working to drive demand and seeing demand? Thank you. Speaker 200:37:10Yes, Dana, thanks for the question. Look, we start out each year planning whether to be Normal. This year was clearly an aberration of that. We do believe that weather should be at least neutral In a comparable basis, it should be a bit of a tailwind going in next year. The same with consumer inventory That gets worked through the channel. Speaker 200:37:32That should be a tailwind for us as well. The headwinds into next year in terms of sales is we got a little out of our normal lane in terms of pricing going into the quarter. We're a little bit above specialty retail. We've done that in the past and had those prices come up. We've been able to move up in price and have others follow. Speaker 200:37:55That didn't happen this year. So I think that's a good learning from us and we will keep our historical price position just below or equal to specialty and just above mass. And then as we think about additional puts and takes into next year, the in a needs based industry, the way we think about marketing is it doesn't drive need. Need comes from the installed base. It does drive market share gains. Speaker 200:38:24The challenge we've had with marketing this year is with the headwinds of weather and some excess inventory in the consumer channel, We weren't getting our typical ROI on marketing spend and therefore haven't been as aggressive. We would expect that to normalize next year. And then our ability to market at a hard spend marketing invest in marketing, sorry, at a high ROI should drive Should get us back on track with market share gains. Speaker 800:38:55Got it. And then just as you This quarter, was there any change in the quarterly progression or the cadence of the quarter? Speaker 200:39:08June was very tough in Q3 for us. I quoted that it was the toughest quarter overall In terms of weather from Plantalytics in a decade and Weather Trends International had it as coldest June in 19 years. So We came into the season as we always do waiting to see what kind of reaction we get over the Memorial Day weekend. And it was very disappointing just to see no lift in the business. And that's when we started both surveying customers, as well as speaking more directly to our District managers and store owners about what was going on and started to take the price actions that we did on Sixone. Speaker 200:39:53So it was a challenging traffic situation for the entirety of the quarter. Speaker 800:40:01Got it. Thank you. Operator00:40:06Our next question comes from Elizabeth Suzuki with Bank of America. Please go ahead. Speaker 900:40:13Great. Thank you very much. So I guess You mentioned you're seeing some of the same factors impacting the pro business as the retail business. I mean, does that include the pantry loading behavior of folks using chemicals they Stored up from last year. I mean, are PROs doing that too? Speaker 900:40:28And then is there anything you can do to educate customer about issues that they might experience if they're using expired chemicals? Speaker 200:40:37Yes, Liz, thanks. Good questions. We did not see that behavior on the pro side. Now our survey was just to residential consumers, but I don't believe we're seeing that on the pro side. I think the pros went into the season Believing that Trichlor pricing should come down, and they were correct. Operator00:40:59I Speaker 200:40:59think residential Consumers came out of last year wondering where price and where availability would be and ended up stockpiling based on the prior 2 years that they had experienced. Operator00:41:12I'm sorry. Go ahead. Speaker 200:41:16Was there a second part to your question? Sorry. Speaker 900:41:19No, just about like educating the customer about what could happen if they're using these older chemicals If there's anything from a marketing standpoint you can do to kind of get that message across. Speaker 200:41:33Yes, very good point. And yes, We're doing that in our blogs and that's why this is so unprecedented. It's not these are not chemicals you want to store. And look, it's predominantly trichlor and And Trichlor loses its efficacy, if not stored properly and will lose it within a year depending on temperature and ventilation. And Cal Hypo is a little more dramatic because the granular turns to solid and it also has combustible properties. Speaker 200:42:07So not something that consumers should be storing and not Operator00:42:21Our next question comes from Garik Shmois with Loop Capital Markets. Please go ahead. Speaker 1000:42:28Hi, thanks. You touched on the SG and A reductions that you're expecting in the Q4, dollars 15,000,000 in lower Costs compared to the prior year period. Just wondering if you could provide maybe some more color on the steps that you're taking and how you're viewing SG and A at this point is we're moving closer into fiscal 2024. Speaker 200:42:52Yes, Gary, good question. We're Look, the way we're thinking about SG and A is we're going to reduce it Both in Q4 and in our run rate into 2024 to help make our P and L more durable against some of the shocks that we experienced this quarter. And in terms specifically of SG and A areas we're addressing in the Q4 into next year, I can tell you overall, it's up and down the P and L. We spoke a little bit earlier about marketing. Marketing comes down naturally when we can't get the ROI that we expect on our investments. Speaker 200:43:31So marketing has come down in Q3 in Q4 and for the year, but we would expect that to recover in the next year when the consumer inventory is absent. With traffic being down as much as it has, driven by weather and consumer inventory, we've taken down labor hours in the stores accordingly. In terms of just being more efficient, we are de layering our corporate organization, More efficiency, more optimization. And then little things like travel, supplies, all out, All out push across those categories. And then finally, a big chunk of it is performance compensation. Speaker 200:44:14This is not a year where we will be paying ourselves or associates. Speaker 1000:44:22Understood. I wanted to follow-up on inorganic growth. Does the challenging environment right now change your view On either M and A or new store expansion? Speaker 200:44:37No, it doesn't because we think weather over time tends to And if consumers have inventory in their garages and sheds as it appears they do, that's a very unusual inventory are very unusual situation. And the catalyst for it, which is 3 years of spotty availability and increasing price, that catalyst is gone. Inventory is readily available. That's readily available across all sizes. So we would expect that to be transitory as well. Speaker 200:45:09And the challenges that we're facing in the quarter and this year, so is specialty retail. I think you can see that in some of the distributors results. So it actually makes M and A more attractive in terms of the multiples that we are able to execute against. But given the results in this quarter and our outlook for the year, As we said in our prepared remarks, we're going to be prudent about it and we're going to watch the pace of M and A, but we still think it's an important initiative for Lesley, it's over the long term. Speaker 1000:45:46Okay, understood. Thanks again. Speaker 200:45:48Yes. Operator00:45:52Our next question comes from Jonathan Matuszewski with Jefferies. Please go ahead. Speaker 700:45:59Hey, good afternoon. Thanks for taking my questions. The first one was on pricing actions. Mike, I think you mentioned The guidance assumes no change in pricing. Is there anything that would lead you to deviate from current pricing? Speaker 700:46:15I guess another way of asking, if traffic or transaction is softer, would you further reduce pricing to try and Dem, the excess transaction decline? Thanks. Yes. Speaker 200:46:29When I said no change in current pricing in the prepared remarks, That was specifically for 4 Pro where we have seen some Tricore pricing come down, offset a little bit by Cal Hypo, which is up. In terms of residential, I think currently we view the demand in the industry At this moment, that's fairly inelastic. Now when we think about what's driving the traffic declines And the traffic declines we don't think are being driven by price sensitivity. They're being driven by weather, and consumer inventory, which we believe are transitory. So we need to wait those out. Speaker 200:47:12The price actions we took was because We had gotten, as I mentioned, above specialty retail and that's not a position that our consumers are used to seeing us in and not one that we want to be in. So we took our actions on Sixone. We lined up with the industry. We are where we want to be from a price standpoint. And now we need to let this year play out, the weather normalize, Consumer inventory normalized and we should be back to our regular cadence of growth. Speaker 700:47:47Got you. That's helpful. And then just my follow-up, it sounds like the customer insights work picked up on some price sensitivity. Curious to what extent you think equipment upgrades and related spend that didn't materialize In the second half of this year could potentially benefit revenue next year? Thanks. Speaker 200:48:12Yes, it's also a good question. Just the general macroeconomic situation, You hear customer price sensitivity across industries. In the surveys in the survey that we did and the one that we had access to, It was also mentioned very specifically by customers. And I just think that look, I think the entire industry took an awful lot price over the last 3 years and there is still cost pressures. So there's some opportunity to take price. Speaker 200:48:46I think the industry is going to be very mindful and thoughtful about how much price we take because we certainly don't want to create any demand destruction. I think when you look at the equipment business, we reported ours was down 8%. I think Pool Corp reported theirs was down 8% as well. That's predominantly volume at the moment. And I think the read on that is that, Yes, people with certain heightened sense of price sensitivity might be delaying some upgraded purchases, But certainly the Brake Fix business, that is durable and continuing on. Speaker 400:49:31Best of luck. Speaker 200:49:33Thanks. Operator00:49:37Our next question comes from Andrew Carter with Stifel. Please go ahead. Speaker 1100:49:43Yes. Hey, thank you. So a couple of questions I wanted to ask really about visibility into the business. First is in terms of pricing, like Getting out over your skis relative to specialty retail, I mean, how good are your real time insights into kind of your price levels? I know you do channel checks, But is can a customer a DIYer, I don't know that they get listened to if they say, hey, it's cheaper down Street and second to that, how quickly do you respond to feedback? Speaker 1100:50:09And then just a second kind of point, putting all the consumer work survey work Saad, have you looked at considering how many pounds of chemicals went out the door from various locations over the last 4 years? And what a reversion to the mean would look like considering market share gains, just to kind of give you a sense of where you actually where you could land? Thanks. Speaker 200:50:32Yes. Thanks, Andrew. So a few questions in there. I'll talk about price visibility first and how we think about price. We in 2021 2022, we were able to influence pricing in the residential market. Speaker 200:50:48We came into the preseason, I would say, April, May period, kind of pushing price, taking price and had the market follow us. When we went in this year, our pricing coming into the quarter and into the year was our Q4 pricing. So our intent was to hold that pricing for the balance of this year. We knew prior to Memorial Day that our pricing was a little above specialty. We thought specialty might come up and meet us. Speaker 200:51:23They did not. And it was after that on sixone that we took our price actions. And we have good visibility in the pricing. I mean, we understood what that dynamic was. We thought we'd be able to move price up and we weren't able to. Speaker 200:51:38We use a combination of web scraping And with over 1,000 stores and store managers and DMs out there, we have a fairly fulsome Ability to track our mom and pop competitors as well. And then I think on the last question about the pounds analysis, we are looking at that. I think the surveys we did were not specific to Leslie's. And we think that's an important component of How we think about the headwind it created for this year because our growth as you know is a combination of comp growth in a typical year, but also market share gains and both become more difficult when there is excess inventory in the channel. I'll go Speaker 1100:52:34ahead and pass it on since I asked to. Thanks. Operator00:52:44Our next question comes from Peter Benedict with Robert W. Baird. Please go ahead. Speaker 1200:52:52Yes, good afternoon, guys. It's Justin Kleber on for Pete. Mike, I just wanted to ask, I imagine you're having discussions Today with your vendors regarding the 2024 policies. I'm just curious what does the costing backdrop look like sitting here today, particularly on these nondiscretionary Products, do you think product costs are still going to move higher next year? Just trying to understand this product margin pressure, Could it linger if you and the industry just can't pass through any more price? Speaker 1200:53:22That's my first question. Yes. Speaker 200:53:25I appreciate the question. It's too early for us to talk about that. We have not really started price discussions with our vendors yet. Typically that takes place 30 to 60 days from now. Yes, I think it's important for both sides to understand kind of how the season wraps up a little further through our Q4 and their Q3. Speaker 200:53:50And then we will sit down and talk about the dynamics that we see. There's certainly some cost pressure, but I think there's also After 3 years of consumers absorbing a lot of inflation, there's definitely some more price sensitivity from customers. I mean, We have 85,000 consumers a day coming through our doors and our stores. We are ears to the ground, I would say, The first line I'm hearing from consumers. And I think the message has been pretty clear that their appetite for continuous price increases is a little more nuanced than it has been in the past. Speaker 1200:54:34Got it. Okay. Now that makes sense. And then an unrelated follow-up on leverage. Steve mentioned the 3 times target. Speaker 1200:54:41In terms of the path to get there, is that more about natural deleverage as EBITDA recovers and starts to grow again? Or Are you foregoing some store growth and M and A opportunities in the near term and deploying capital into debt paydown? Speaker 400:54:59Yeah. Thanks for the question, Justin. I think there's a couple of different ways to think about it. We would expect to reduce leverage by combination of growth in the business, so just naturally and potentially allocate some cash towards debt pay down. If you think about cash flow for this year, it's been impacted By working capital primarily, if you look at our CapEx, that's kind of in line with how we talked about it. Speaker 400:55:24We talked about kind of a 3% of total sales, Coming a little shy of that this year, from an M and A perspective, certainly slower pace this year from a dollars perspective, but continue to do Attractive deals and acquire businesses at great multiples. I expect that to continue through Q4 as well at a modest clip. And so when it comes down to 2023, you think about the cadence for working capital last year. We were buying a lot of inventory late in the season, Led to accounts payable and other accrued expenses that ended up getting paid off in the Q1 of 2023. At this point, we've talked about bringing inventory down pretty aggressively in the year end. Speaker 400:56:04But as a result, we'll have lower accounts payable and certainly So don't expect a big cash flow year in 'twenty three, but do you see opportunity for improvement in 2024, which could lead us to continue to deploy capital towards debt paydown as well as invest in stores and M and A. Last comment I'd make on that, as you think about new store growth, fairly modest capital requirements for a new store location or a conversion as we convert stores to pros. And if you look at the M and A that we're executing in the current environment, it's a lot of Retailers in the Sunbelt, smaller locations, it's not a big cash drain from an M and A perspective. So But clear opportunity to continue to deploy capital towards growth, but it will probably look a little different than it has the last couple of Operator00:57:06There are no further questions at this time. I would like to turn the floor back over to the management for closing comments. Please go ahead. Speaker 200:57:16Yes. I'd like to thank everybody for joining us today and your continued interest in Leslie's.Read morePowered by